Report: Banks driving borrowers into debt with payday loans

Some of the nation’s largest banks are providing short-term loans with interest rates of up to 300 percent, driving borrowers into a cycle of debt, according to a new report from the Center for Responsible Lending.

The study, due out Thursday, gives an updated look at the perils of advance-deposit loans offered by Wells Fargo, U.S. Bancorp, Regions Bank, Fifth Third Bank, Guaranty Bank and Bank of Oklahoma. Banks bristle at comparisons to storefront payday lenders, but researchers say their products carry the same abusive high-interest rates and balloon payments.

Banks market these products, carrying such names as “Early Access” or “Ready Advance,” as short-term solutions for emergencies. But the average borrower took out at least 13 loans in 2011 and spent much of the year saddled with the debt, according to the study by the center, an advocacy group. Researchers looked at a sample of 66 direct deposit advances over a 12-month period.

Critics say the structure of advance-deposit loans promotes a cycle of debt. Account holders typically pay up to $10 for every $100 borrowed, with the understanding that the loan will be repaid with their next direct deposit. If the deposited funds are not enough to cover the loan, the bank takes whatever money comes in, triggering overdraft fees and additional interest.

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Officials at Wells Fargo say the bank leaves its customers a $100 cushion in cases where the deposited funds are not sufficient to repay the advance. The bank, which rolled out the product in 1994, offers an installment plan for customers to avoid balloon payments. But it is only offered to people with at least $300 in outstanding debt who have been hit with balloon payments for three consecutive months.

“We’re very clear that this is an expensive form of credit and not to be used as a long-term solution,” said Wells Fargo spokeswoman Richele Messick. “We are very upfront and transparent with our customers about this service.”

Not everyone agrees. One Wells Fargo customer, who spoke to researchers for the report, said she was not fully aware of the full range of fees attached to the payday loan. Annette, who declined to give her last name, took out a $500 payday loan five years ago that has wound up costing more than $900 in fees. Wells has made 25 advances to the 69-year-old widow in that time.

Consumer advocates are concerned that federally regulated banks can sidestep stricter state laws that govern payday lenders. At least 15 states have banned the service, while several others have imposed tougher laws to limit the number of loans that can be made and the interest rates.

The Consumer Financial Protection Bureau has supervisory and enforcement authority for storefront and bank payday lenders with more than $10 billion in assets. Officials at the bureau say they are monitoring the market.